“Increasingly the choice facing the government is between inflation or bad loans,” said Shih, author of the book “Finance and Factions in China,” who teaches political science at the university in Evanston, Illinois. “The only mechanism for controlling inflation in China is credit restriction, but if they use that, this show is over — a gigantic wave of bad loans will appear on banks’ balance sheets.”

Attempts to curb borrowing by raising interest rates would boost debt-servicing costs for local governments. At the same time, tightening credit may stall projects, triggering “a build-up of bad loans,” the Basel, Switzerland-based Bank for International Settlements said in a quarterly report in December.

Sun Mingchun, an economist with Nomura in Hong Kong, estimates local governments have proposed projects with a value of more than 20 trillion yuan since the stimulus package was announced in November 2008.

Should the boom end in a property-market collapse, even those stocks tied to the local government projects will be affected along with most other industries, said Shanghai-based independent economist Andy Xie, formerly Morgan Stanley’s chief Asia economist.

“Corporate profits are very much driven by the property sector,” said Xie. “The largest sectors will be hit hard, especially banks and insurance companies.”

A gauge of property stocks has fallen more than 6 percent this year after more than doubling in 2009 as the government takes steps to cool rising prices, including raising the deposit requirement to 20 percent of the minimum price of auctioned land. Property sales were equivalent to 13 percent of gross domestic product last year.

“Policy makers may need to start thinking about how to handle the aftermath of the bust,” said Nomura’s Sun.

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